Safeguard Policies for Financial Intermediaries? Stephanie Fried ` Ulu Foundation Stephf99@gmail London, November 2010

1. Safeguard Policies for Financial Intermediaries?Stephanie Fried`Ulu FoundationStephf99@gmail.comLondon, November 2010

2. OPIC and ADB Standards • Focus on OPIC & ADB safeguards for Financial Intermediaries • Context: • New OPIC rules August 2010 • ADB rules January 2010 • IFC Performance Standards Review (ongoing) • ADB PCP review (ongoing) • WB Safeguards Review, started November 1, 2010 • U.S. midterm elections

3. Groundhog Day? Fifty First Dates?

4. Follow the Money Over the past two decades, project-affected peoples, environmentalists and human rights advocates have used a “follow the money” strategy to influence public multilateral financial institutions, such as the World Bank, and bilateral financial institutions, including Export Credit Agencies (ECAs) of OECD member countries as well as private sector banks.

5. Safeguard Policies Improvements in environmental and social safeguard policies at multilateral development banks and ECAs as a result of interventions on specific projects have led to improvements in human rights and environmental impacts in a range of countries and projects, primarily for project finance.

6. Upward Harmonization Advocates have also worked to ensure the upward harmonization of environmental and social standards of private sector banks through the development of the Equator Principles. This is not to say, however, that the improved policies are necessarily routinely implemented by public or private financial institutions.

7. Financial Intermediaries Perhaps in response, Multilateral Development Banks with poverty alleviation mandates, bilateral export credit agencies and other public financial institutions have increasingly been investing in financial intermediaries, including private equity funds domiciled in secrecy jurisdictions. Apparent lack of meaningful environmental/ social due diligence

8. Massive Growth in Use of Financial Intermediaries by Public Financial Institutions • IFC’s committed portfolio in financial sector investments grew sevenfold, from $1.7 billion in 2004 to $12.3 billion in 2008. • In 2009, finance sector lending made up almost 40 percent of the disbursed investment portfolio and over half of all new project commitments.

9. EBRD The European Bank for Reconstruction and Development has investments in over 70 private equity funds, potentially involving over 700 companies.

10. Asian Development Bank The ADB has targeted private equity funds as a key component of its private sector development strategy. Approximately 40 ADB private equity funds, domiciled for the most part in secrecy jurisdictions such as the Cayman Islands, invest in an average of 10 companies each, yielding a potential total of some 400 companies, all overseen by two relatively junior staff. Approximately 50% of ADB-held funds have been approved since 2003.

11. Asian Infrastructure Fund For example, both the Asian Development Bank (ADB) and the IFC have had equity investments in the Asian Infrastructure Fund (AIF), a private equity venture domiciled in the Cayman Islands, managed by a firm in Hong Kong and capitalized at close to $1 billion.

12. Asian Infrastructure Fund • The ADB reports that the Bank’s $20 million commitment allowed AIF to mobilize $780 million, a leverage ratio of nearly 40:1. • AIF has made equity investments in (unnamed) telecommunications, power, port, and road projects, which amounted to $6 billion in total investment, or 300 times ADB's equity stake. • Yet little information is available on social and environmental aspects of these investments.

13. ADB Safeguards Campaign • Five year effort, massive civil society input • Achievements • 120 day disclosure requirement for projects likely to have significant impacts • Environmental assessments for all components of all projects, regardless of funding source • Bank must conduct own due diligence and ensure client compliance with environmental and social requirements

14. ADB Safeguards • New rules for Financial Intermediaries, necessitating ADB approval of Category A subprojects (portfolio companies); • Greater focus on gender issues/data differentiation; • Commitment to “no policy dilution” or weakening of existing standards as result of review

15. FIs as Extension of Public DFIs • A Financial Intermediary essentially assumes the role of a public DFI and acts as an extension of the DFI, yet usually safeguard policies and disclosure requirements do not apply. • In the case of the IFC, not all important IFC Sustainability Policy and Disclosure Policy requirements apply to the FI. • For example, neither IFC nor the FI are required to disclose, publicly, the name, location, and other critical information about the portfolio companies or subprojects.

16. IFC • No requirement for IFC Board or even IFC staff to approve subprojects, even those in high-risk sectors and those that require significant IFC funding; • The Policy and Performance Standards do not specify how, specifically, FIs perform due diligence for FI subprojects. Similarly, only some Disclosure Policy requirements apply to FIs. •  IFC performs due diligence only in relation to the entire FI portfolio, which may not describe all projects for which IFC funding will be used. • The IFC Board and IFC fail to ensure that IFC funds support development outcomes that achieve IFC’s poverty alleviation mission and do not cause social harm or environmental damage.

17. Overseas Private Investment Corp. • “OPIC-supported funds are among the largest providers of private equity capital to emerging markets.” • Since the inception of its investment funds program in 1987, OPIC's funding  commitments (as of FY 2009) have totaled $3.6 billion to more than 50 private equity funds. • These funds in turn have invested $4.6 billion in over 470 privately-owned and managed companies… located across 53 developing countries that are eligible for OPIC support.

18. OPIC and FIs • OPIC initiates call for investors, makes announcement – identifies sector, region • One third debt provided by OPIC • Two thirds equity provided by investors

19. Campaign • Environmental and Social Safeguards • Held up Congressional appropriations for 3 years • Late August 2010, OPIC published new environmental and social safeguard policy

20. FIs “Put on Notice” • “[P]utFIs on notice that OPIC’s support of the FI’s activities is conditional and that Subprojects will be screened and subject to the full scope of OPIC’s environmental and social assessment process including, but not limited to, public disclosure and consultation, GHG emission accounting, and conditions and monitoring requirements as warranted by the nature and scope of the Subproject.

21. Subprojects “OPIC screens, reviews and provides prior written consent to all Subprojects on the basis of potential environmental and social risks.”

22. Using IFC PS but not delegating • A significant amount of language in the OPIC policy is dedicated to underscoring the fact that OPIC will no longer delegate responsibility for most of the important Performance Standards requirements to Financial Intermediaries, or simply accept at face value self-reported claims made by FIs

23. Taking back responsibility • “OPIC reviews risks and impacts” • “OPIC categorizes projects” • “OPIC does not delegate” • “OPIC screens, reviews, provides prior written consent to all Subprojects” • “OPIC confirms that Applicant has undertaken Meaningful Consultation” • “OPIC monitors project compliance with all environmental and social requirements that are reflected in conditions and covenants in OPIC Agreements.”

24. Binding language • OPIC’s new rules require that binding language pertaining to Performance Standards, laws, regulations and other rules be placed in all contracts, including with subcontractors

25. Legal Covenants • Performance standards will be incorporated in OPIC loan or guarantee agreements, project consent documents or insurance contracts, pg 6, pg 38 • “OPIC is responsible for ensuring that all OPIC Agreements include the specific performance standards that a project is required to meet throughout the life of OPIC support.” Pg 13 • “The coverage of the covenants [of the OPIC Agreement] includes, but is not limited to (1) compliance with all applicable Performance Standards, Industry Sector Guidelines, host country laws and regulations, and any supplemental standards identified by OPIC; (2) mitigation commitments, including those contained within any required ESAP and Remediation Plan; (3) notification and reporting requirements, including the format for annual reports based on OPIC-approved monitoring methodology; and (4) on-going stakeholder engagement and reporting requirements.” 6.2, pg20

26. Risk Categorization • OPIC’s language elaborates further upon existing Category A, B and C definitions and requirements and specifies that risk categorization includes “direct, indirect, induced, regional, trans-boundary and cumulative environmental and social impacts” at “pre-construction, construction, operation, decommissioning, and closure” including of privatization projects.

27. Third Party Audits • Third party audits are required to ensure compliance with social and environmental rules for all Category A projects. (5.10, pg 16) and OPIC must approve “ the audit scope of work and the selection of third party auditors.” 7.9, pg 23

28. International Law • “4.2 At a minimum, OPIC requires that all projects must meet the Performance Standards, applicable Industry Sector Guidelines, including any revisions issued by IFC, and host country laws, regulations and standards related to environmental and social performance, including host country obligations under international law.” Pg 13

29. Performance Standards + • “4.3 OPIC is responsible for identification of supplemental standards (over and above those standards identified in Paragraph 4.2) when additional preventative or protective measures are necessary to adequately mitigate specific project-related environmental and social risks and impacts.”

30. “Business Confidentiality” • OPIC limits the definition of “business confidentiality.” The standard used by OPIC for withholding records from public disclosure it those records or portions of records “that are exempted from public disclosure under the [US] Freedom of Information Act”.

31. Non-compliance • OPIC describes conditions for declining support for a given project, equates non-compliance with environmental and social provisions as potential default.

32. Extractive Industries Transparency Initiative (EITI). • For all projects greater than $10 million,, applicants “must agree to implement EITI principles and criteria” and “host country must have committed to EITI principles and criteria” or be taking steps to establish functioning systems.

33. Disclosure • OPIC’s potential participation in a proposed investment must be disclosed to project affected people. Pg 18, 5.16

34. Loopholes • Use of other MDB standards • Renewables • Etc.

35. What next? Your help needed • Work on IFC PS re FIs • Call for upward harmonization • DANGER of WB review – changes in defn of enviro, social assessment, resettlement etc impact FI assessment rules • Climate finance – FIs • Reverse buyouts as Fis?